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The Airlines Get Out The Good China

February 02, 1992

Marketing

THE AIRLINES GET OUT THE GOOD CHINA

The spirit of airline competition in the 1980s was probably best captured in 1988, when Robert L. Crandall, chairman of American Airlines Inc., issued his ruling on olives: Get rid of them, he said. Leaving them out of salads saved $40,000 a year. But take a look at competition Nineties-style: For $2,650 round-trip, first-class passengers on American's newly revamped New York-Los Angeles route will recline in sleeper seats while watching movies on personal four-inch video screens. Travelers on American's new business class will pay $1,996 round-trip to dine on fine china and adjust leg rests at the touch of a button. And in both of those classes, sheepskin-and-leather seats will coddle fliers. Says Senior Vice-President for Marketing Michael W. Gunn: "We think service is in."

He's not the only one. Having lost roughly $2 billion last year, U.S. carriers are desperate to raise domestic fares--and some are advancing the dubious notion that better service will make higher fares more palatable. American, Northwest Airlines Inc., and other carriers are plugging amenities to entice travelers to pay more. Trouble is, corporations caught in the grip of recession are cutting budgets to the bone and making executives fly cheaper--when they fly at all. But airlines, having suffered huge losses competing on price, are determined to focus on service.

Most major carriers are getting in on the act. American spent $13 million reconfiguring 10 planes so it can charge stiffer premiums in first and business class on transcontinental flights. United Airlines Inc. recently introduced its Connoisseur, or business, class on four domestic-only routes. And when their planes with three-class cabins equipped for international travel fly domestic laps, both United and Delta Air Lines Inc. demand premiums for the fancier service. Northwest says it will spend $450 million by 1995 for new interiors, service-training classes, and an in-flight entertainment system called WorldLink. Northwest hasn't tied WorldLink to any fare hike, but Executive Vice-President for Customer Service Joseph Leonard says: "We believe people expect quality and that they'll pay extra for it."

Not that discounting is a thing of the past. On Jan. 11, Trans World Airlines Inc. slashed prices for business-class fares on transcontinental flights to $550. United and then Delta followed suit. American cut its coach fares, too, but held the line on business-class seats. Most analysts, however, agree that the days of all-out fare wars are over. That's because most of the low-cost airlines are gone or in bankruptcy, and aside from such small, short-haul carriers as Southwest Airlines Co., the only airline left that is trying to win market share by cutting fares is debt-burdened TWA. "The battle for position between United and Delta and American can't be done on cost," says transportation specialist Harold Sirkin of Boston Consulting Group. "It's got to be done on service."

Much of the action will center on business travelers. Roughly 50% of all domestic passengers are on business, but 80% of those are flying on discount fares, says Lee Howard, president of Airline Economics Inc. Even a one-percentage-point conversion to full fare would mean an additional $1 billion in revenue for the industry, he says.

NORTHERN EXPOSURE. The airlines are beginning with markets where they think passengers will be most willing to pay higher fares for better service. Last November, Northwest introduced its Fastrak program to lure business travelers aboard its shuttle flights between Minneapolis and Chicago. Besides express check-in and the use of fax machines in the terminal, the airline promises to telephone your associates if your plane will be delayed. Northwest is charging a hefty $647 round-trip. That's the same as United, the only other carrier regularly serving this route. Northwest says it will introduce the service on other routes if it proves popular.

Travel-industry executives applaud the attempts to raise fares through improved service. Gordon D. Lambourne, a public-relations director at Marriott Corp., notes that Marriott has its own version of business class with "concierge floors." He says the airlines' new programs will appeal to executives weary of the hassles of flying coach. There's only one problem: His company allows executives to fly business class only when traveling overseas. If enough corporations share that policy, carriers may find that improved domestic service--plus higher prices--equals more empty seats.Andrea Rothman in New York, with Kevin Kelly in Chicago and bureau reports